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Abstract

This paper investigates price-setting for truly homogenous products sold in markets without any formal trade barriers. We use data from IKEA, a furniture company selling identical products in an identical shopping environment in different EU countries. We get four remarkable outcomes: 1) The law of one price does not hold. 2) Country-specific effects of non-tradable cost components are important. 3) Pricing to the market surely occurs but price discrimination is limited by incomplete information. 4) The unexplained part of between-country price variation for identical products is about 75% which leaves most of the inter-country price variation unexplained.

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File URL: http://ftp.iza.org/dp315.pdf
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Bibliographic Info

Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 315.

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Length: 31 pages
Date of creation: Jun 2001
Date of revision:
Handle: RePEc:iza:izadps:dp315

Contact details of provider:
Postal: IZA, P.O. Box 7240, D-53072 Bonn, Germany
Phone: +49 228 3894 223
Fax: +49 228 3894 180
Web page: http://www.iza.org

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Postal: IZA, Margard Ody, P.O. Box 7240, D-53072 Bonn, Germany
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Related research

Keywords: price discrimination; Price setting;

Find related papers by JEL classification:

• D4 - Microeconomics - - Market Structure and Pricing

This paper has been announced in the following NEP Reports:

• NEP-ALL-2001-07-13 (All new papers)
• NEP-IFN-2001-07-13 (International Finance)

References

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1. Kasa, Kenneth, 1992. "Adjustment costs and pricing-to-market theory and evidence," Journal of International Economics, Elsevier, vol. 32(1-2), pages 1-30, February.
2. Atish R. Ghosh & Holger C. Wolf, 1994. "Pricing in International Markets: Lessons from The Economist," Working Papers 94-21, New York University, Leonard N. Stern School of Business, Department of Economics.
   
   • Atish R. Ghosh & Holger C. Wolf, 1994. "Pricing in International Markets: Lessons From The Economist," NBER Working Papers 4806, National Bureau of Economic Research, Inc.
3. Knetter, Michael M, 1989. "Price Discrimination by U.S. and German Exporters," American Economic Review, American Economic Association, vol. 79(1), pages 198-210, March.
4. Kenneth A. Froot & Michael Kim & Kenneth Rogoff, 1995. "The Law of One Price Over 700 Years," NBER Working Papers 5132, National Bureau of Economic Research, Inc.
   
   • Kenneth Rogoff & Kenneth Froot & Michael Kim, 2001. "The Law of One Price Over 700 Years," IMF Working Papers 01/174, International Monetary Fund.
   • Froot, Kenneth A. & Kim, Michael & Rogoff, Kenneth, 1995. "The Law of One Price Over 700 Years," Working Papers 95-13, C.V. Starr Center for Applied Economics, New York University.
5. Kenneth Rogoff, 1996. "The Purchasing Power Parity Puzzle," Journal of Economic Literature, American Economic Association, vol. 34(2), pages 647-668, June.
6. Goldberg, Pinelopi Koujianou & Verboven, Frank, 2001. "The Evolution of Price Dispersion in the European Car Market," Review of Economic Studies, Wiley Blackwell, vol. 68(4), pages 811-48, October.
   
   • Pinelopi Koujianou Goldberg & Frank Verboven, 1998. "The Evolution of Price Dispersion in the European Car Market," NBER Working Papers 6818, National Bureau of Economic Research, Inc.
   • Goldberg, Pinelopi Koujianou & Verboven, Frank, 1998. "The Evolution of Price Dispersion in the European Car Market," CEPR Discussion Papers 2029, C.E.P.R. Discussion Papers.
   • Goldberg, PK & Verboven, Frank, 2001. "The evolution of price dispersion in the European car market," Open Access publications from Katholieke Universiteit Leuven urn:hdl:123456789/101069, Katholieke Universiteit Leuven.
7. Pinelopi K. Goldberg & Michael M. Knetter, 1996. "Goods Prices and Exchange Rates: What Have We Learned?," NBER Working Papers 5862, National Bureau of Economic Research, Inc.
   
   • Pinelopi Koujianou Goldberg & Michael M. Knetter, 1997. "Goods Prices and Exchange Rates: What Have We Learned?," Journal of Economic Literature, American Economic Association, vol. 35(3), pages 1243-1272, September.
8. Kravis, Irving B & Lipsey, Robert E, 1977. "Export Prices and the Transmission of Inflation," American Economic Review, American Economic Association, vol. 67(1), pages 155-63, February.
9. Sven W. Arndt & J. David Richardson, 1988. "Real-Financial Linkages Among Open Economies," NBER Working Papers 2230, National Bureau of Economic Research, Inc.
10. Michael M. Knetter, 1997. "The Segmentation of International Markets: Evidence from The Economist," NBER Working Papers 5878, National Bureau of Economic Research, Inc.
11. Verboven, Frank, 1996. "International price discrimination in the European car market," Open Access publications from Katholieke Universiteit Leuven urn:hdl:123456789/101467, Katholieke Universiteit Leuven.
    
    • Frank Verboven, 1996. "International Price Discrimination in the European Car Market," RAND Journal of Economics, The RAND Corporation, vol. 27(2), pages 240-268, Summer.
12. Varian, Hal R., 1989. "Price discrimination," Handbook of Industrial Organization, in: R. Schmalensee & R. Willig (ed.), Handbook of Industrial Organization, edition 1, volume 1, chapter 10, pages 597-654 Elsevier.
13. Isard, Peter, 1977. "How Far Can We Push the "Law of One Price"?," American Economic Review, American Economic Association, vol. 67(5), pages 942-48, December.

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Cited by:

1. Marianne Baxter & Anthony Landry, 2012. "IKEA: product, pricing, and pass-through," Globalization and Monetary Policy Institute Working Paper 132, Federal Reserve Bank of Dallas.

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